from the August investment comments from Provident Investment Management
EPS growth for the S&P 500 in Q1 was 0.8%. According to FactSet’s Earnings Insight, the consensus is for a 3.0% decline in EPS in Q2.
Accounting for the average earnings “beat” over the past five years, this actually implies EPS growth of approximately 1%. For the year, earnings are expected to grow over 2%, as we lap the tax cuts from a year ago and companies manage the headwinds from tariffs. Given some of the cross currents the Fed is monitoring, a particularly close eye will be given to companies’ forecasts for the remainder of the year.
Market returns generally follow earnings growth over the long run, but this correlation is loose over short periods of time. Keep in mind that the market was down last year despite 20% EPS growth. Furthermore, headline returns for this year have benefitted from a cosmetic lift given the market’s swoon in late December. Year-to-date returns on the S&P are approximately 20%, but on a 52-week basis returns have been closer to 8%.
Expect the Fed, trade, and political factors to continue to impact market performance. Investing in quality, durable, growing businesses is a sensible investment strategy no matter which of these factors is driving short-term performance. Over long periods of time these are the types of companies that are most likely to allow investors to achieve their objectives.